Manufacturing Mexico Loses Its Appeal as a Business Location
In June, the BMW Group opened the most innovative plant of their worldwide production sites in San Luis Potosi, Mexico. But the Mexican hub is suffering under US policy and is no longer as attractive as it used to be – especially suppliers are already feeling this development.
The construction of the new BMW plant in San Luis Potosi (Mexico) was guided by the principles of Industry 4.0. Cooperating robots, a paperless production, the use of Augmented Reality in assembly are just a few examples of the state-of-the-art automobile production of BMW: "Thanks to the use of new technologies, the production system we built in San Luis Potosi will be leading in productivity and sustainability," announced Oliver Zipse, Member of the BMW Board of Management responsible for Production, at the Grand Opening at the beginning of June. However, the framework conditions for the production of the seventh generation of the 3 Series models in Mexico have changed dramatically since the beginning of the planning phase five years ago: The US president put a spoke in BMW's opening ceremony by his never-ending trade dispute with the world and the threat of imposing import duties on goods from Mexico. Oliver Zipse remains unimpressed: "We see no reason to change our manufacturing strategy in North America." The new and extremely flexible plant had been deliberately placed in the NAFTA region and a long-term strategic decision had already been made in 2014 during the planning phase. "Mexico is strategically located between North and South America, the Atlantic and the Pacific," said Zipse.
A Question of Creativity
Zipse retorted that BMW would have the right answers at the right time in the event of new US import duties. It is conceivable that in such a situation BMW will start shipping the 3-series produced in San Luis Potosi across the Atlantic and will again import the models from Munich almost duty-free directly to the USA - instead of via the expensive short way from Mexico. If Trump makes good on his threat to impose duties on European goods, BMW's latest plant in Mexico would have to react quickly and flexibly and to produce other models for the important US market.
A further challenge for BMW’ sensitive import and export structure is the NAFTA successor agreement USMCA. When it comes into force, the local content targets will rise from the current 62.5 %, which is currently fully met, to 75 %. Andreas Wendt, the Board Member responsible for Purchasing and the Supplier Network, commented on this: "We can change the local content if required in the future. I'm thinking, for example, of the scope of transmission production." In order to obtain these components, BMW has signed a long-term contract with ZF Friedrichshafen. “The decisive factor for us is to ensure an overall global optimum”, says Wendt. To a certain extent, this may also entail additional costs in the form of import duties. BMW promotes worldwide free trade. We also rely on global purchasing markets. Barrier-free access is a crucial factor not only for BMW's business model, but also for growth, prosperity and employment throughout the economy."
One Plant, 220 Suppliers
BMW's purchasing volume in Mexico is $ 2.5 billion. A total of 220 companies supply the plant, including Boysen, Magna and Dräxlmaier, who have set up their production facilities in the direct vicinity of BMW. ZF (still) delivers its products from Friedrichshafen; the cable harnesses from Leoni arrive by truck from Merida on the Yucatan Peninsula, 1,700 kilometers away. The components that BMW procures just-in-time or just-in-sequence are found in all areas of the vehicle: from the interior, exterior and chassis to electrical and electronic components. BMW Board Member Wendt comments on the quality of the components: “It is absolutely comparable to that in Germany and thus at the level we expected." Local value added at BMW's San Luis Potosi plant is 28 %, 60 % in Mexico, and the rest comprises components, some of which from Europe, such as engines. More than 70 % of the added value is generated by the suppliers."
Follow or Lose?
The Mexican-based automotive suppliers are confronted with the challenge of sourcing a higher proportion of their intermediate products from Mexico, the USA or Canada. In addition to the challenges in purchasing, there will be increased expenditure on proof of origin, which in turn will entail higher personnel costs. Suppliers previously based in Bavaria or Europe are faced with the fundamental question of whether to follow their customers to North America or to waive orders from automobile plants on this continent.
It looks rather rosy for machine and plant manufacturers: This will result in new orders from this region. Local suppliers in North America, especially from Mexico, need to modernize their production to meet the high standards of their customers. The question of labor costs will also soon become an additional burden for suppliers. Especially once the Nafta follow-up deal USMCA comes into force. Christian Weber, representative of Bavaria in Mexico, mentioned January 1, 2020 as a realistic date for this to happen. Until then, the current version of the Nafta Treaty will remain in force.
There is a transitional period of three years until the new rules will apply to the automotive sector, which for instance stipulate a minimum wage for industrial workers of $ 16. "This means that the regulations do not apply until January 1, 2023," Weber said. However, because of the interdependencies in the supply chain the impact is already being felt, as OEMs are redefining their supply chain requirements. The question of labor costs will probably lead to a further technologization of production: more engineers, fewer workers, more automation. This is already evident as far as OEMs are concerned, and suppliers have a lot of catching up to do.
Competing for Skilled Workers
There is also an imbalance with regard to available talents: There is a fully-fledged competition between OEMs and suppliers. Mexico is a very attractive location for the automotive industry, and in San Luis Potosi the industry is particularly strongly represented. Skilled workers can easily find numerous entry and career opportunities - especially at OEMs, to a lesser degree offered by suppliers, who are far from being able to offer the same conditions. This phenomenon affects not only Mexico, but the global industry.
Dräxlmaier has been working with BMW for more than 50 years. The company from Vilsbiburg in Lower Bavaria has long been a global player with over 60 locations in 20 countries. Dräxlmaier supplies BMW with a wide range of products, from on-board networks that map the complex requirements of modern assistance systems to autonomous driving, from the interior, which is becoming increasingly important when modern assistance systems ensure that passengers no longer have to devote themselves exclusively to driving, to high-voltage components and complete battery systems for electrified mobility. As one of the first companies in the industry, Dräxlmaier has been represented in San Luis since 2005. Jan Reblin, Manager at Dräxlmaier for Productivity and Sustainability, explains: "At that time, many structures had only just emerged, and we did pioneering work. Today, we are competing on the San Luis Potosi labor market with several OEMs and numerous suppliers. Therefore, the framework conditions for production are becoming increasingly difficult, especially in the supplier sector. Almost full employment in many areas of Mexico and the income gap between the employees of suppliers and OEMs aggravate the situation."
This article was first published by Automobil Industrie.
Original by Christian Otto / Translation by Alexander Stark